RRSP season: Investors still wait to see the real fees

New rules are coming that will expose how much Canadians are paying for their RRSPs and other investments and shake up the entire industry. After this year, Canada's investment brokers and dealers will have to give their clients more transparent, easier to read summaries of investment performance and fees.

New rules on fee transparency will kick in at the end of this year

Small difference in fees can add up to hundreds of thousands of dollars over a lifetime of saving for retirement. But understanding those fees has been difficult. (Shutterstock)

When Nick de Domenico​, a personal injury mediator, was 41 years old, he left his job, started his own business, rolled his employee pension plan into an RRSP and started paying closer attention to his investments and what he was paying his adviser. 

At least, that was the idea.

"It was just mostly making automatic contributions and having frustrating conversations," says de Domenico​.

I'd never get a clear answer. And I would never actually know — no matter how much I pored over the pieces of paper they gave me — what kind of a return I was actually getting.— Investor Nick de Domenico​

"I'd never get a clear answer. And I would never actually know — no matter how much I pored over the pieces of paper they gave me — what kind of a return I was actually getting."

Worse, de Domenico​ says, it was almost impossible for him to decipher how much he was paying in fees.

"I was generally confused and uninformed. I just felt like I was the medium for their earnings," he says.

That is exactly the issue to be addressed by new rules set to start taking effect at the end of this year.

It's all about the fees

The regulation is known as the "Client Relationship Model, Phase 2," or CRM2.

It's an awkward sounding name, but something hugely important for Canadian investors.

CRM2 will require financial advisers, investment dealers and the like to provide much more detailed information on the annual performance of their clients' portfolios.
Investor Nick de Domenico says he was frustrated by the inability to get a clear answer about the return on his investments. (CBC)

Information such as money in, money out, change in value (in dollars, for the past year and since the inception of the account) and annualized total percentage returns for the past year and for the past three, five and 10 years, as well as since inception.

Even more significantly, CRM2 will require brokers and dealers to disclose the fees investors are paying for their investments. 

Those fees are legion, often arcane and sometimes hidden within management expense ratios, making them extremely difficult for the average investor to track.

"Right now [investors are] oblivious, they don't know they're paying these kinds of fees," says personal finance columnist and author Bruce Sellery. "I am hopeful that CRM2 will lead to a change in the way Canadians think about investing." 

Small numbers, big impact

Consider, Sellery says, the cost of even a small fee on the long-term performance of your investments.

"If you save $500 a month, every month for 40 years, you're going to end up with about $1.1 million if you earn six per cent. If you earn five per cent, just one percentage point less, that's going to cost you almost $300,000," Sellery says.

Sellery is not suggesting the industry stop charging these fees. 

"They can charge what they want. This is a capitalist society," he says. "But a consumer can also exercise their own behaviour and go somewhere else where the fees aren't as high."

Or where the fees aren't related to the performance of an investment.

Consider the controversial embedded trailer commissions.

That's where the financial adviser receives a portion of the mutual fund's fee for as long as the client stays in the fund.

Embedded commissions have been banned in the U.K. and Australia.

Canada isn't going that far, but under CRM2, instead of being hidden in a fund's management fees, these commissions will be explicitly spelled out for the investor.

"How an adviser is paid is relevant to the individual investor," Sellery says. "They're incented to support a product that's going to generate the most income for them and not necessarily for your financial well-being."

Lower fees, fewer jobs

In the U.K. and Australia, the elimination of embedded fees and disclosure rules similar to CRM2 resulted in an exodus of financial advisers from the industry. As many as 11,000 advisers have left the business since the reforms kicked in, in 2008.

Without commissions paid for by unknowing investors, many remaining financial planners charge a flat fee for their services, the costs of which can be out of reach for many smaller investors.

It's going to up everybody's game.— Matt Buie, certified financial planner, Assante Asset Management

That's one of the arguments cited by critics of CRM2.

The Investment Industry Association of Canada (IIAC), which represents brokerage firms, has also been lobbying regulators to delay implementation of CRM2. It says the disclosure rules are complex and difficult for many firms to implement.

On Jan. 28, the industry got its wish. Canadian Securities Administrators, the umbrella group of provincial and territorial securities regulators, agreed to push back the start date from July 15 to Dec. 31, 2015.

Change long overdue

But there are many investment professionals in favour of CRM2 who say the regulatory initiative is long overdue. 

"I think it's wonderful," says Matt Buie, a certified financial planner and investment adviser with Assante Asset Management in Vancouver.
Matt Buie, an adviser with Assante Asset Management, says he gets half of his income from fees and half from commissions. (CBC)

"The question that most clients want to know is: 'How much am I paying you for your service, for your advice?'  And that's not very clear. The industry has not done a particularly good job of articulating the fees," says Buie.

"CRM2 is making sure that all the dealers put that information very clearly written down."

Buie says his income is 50 per cent fee-based and 50 per cent commission. He already provides his clients with much of the specific information called for under CRM2 and has done so for years.

"Whenever you buy something, you can gauge what the value is to you [versus] the price you're paying," says Buie.

That value comes not just from picking stocks or funds, but from a more holistic approach to financial well-being, helping clients with everything from education savings to insurance, mortgages to emergency funds, he says.

Financial advisers who don't provide value for their clients, Buie says, will be exposed by CRM2.

"It's going to up everybody's game," he says.

And the beneficiaries of that are investors like de Domenico​.

He knew Buie personally, liked his more open, transparent approach, and has used him to manage his investments since 2005.

"I ask a lot of questions and [Buie] gives me clear answers, and I go away feeling like I've been a good consumer as far as hiring him to manage my portfolio," says de Domenico​. 

Soon other investors should also have a better idea of how their investments are doing and how much they're paying for that performance.

If you have a consumer issue contact Aaron Saltzman.


Aaron Saltzman

Senior Reporter, Consumer Affairs

Aaron Saltzman is CBC's Senior Business Reporter. Tips/Story ideas always welcome.